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Pursuant to a congressional request, GAO discussed the federal government's role in helping pay for Medicaid, focusing on how: (1) the current financing scheme works; and (2) it compromises the agreement for federal/state sharing of Medicaid financing.

GAO noted that: (1) the current scheme inappropriately increases federal Medicaid payments by paying certain providers more than they would normally receive and then having the providers return the bulk of the extra monies to the state; (2) by making an excess payment, the state generates additional federal matching funds, which can be used to pay its share of future Medicaid payments--thus generating even more federal matching funds--or spent however the state determines; (3) the providers receiving the inflated payments and passing back the excess to the state are entities owned by local governments--for example, county-owned nursing homes and local hospital districts; (4) according to the Health Care Financing Administration (HCFA), as of late July, 17 states have state plans that could allow them to use this practice, and 11 other states have drafted plans for doing so; (5) the exact amount of additional federal Medicaid dollars generated through this process is unknown, but it is in the billions of dollars and growing; (6) while most states do not specifically acknowledge how they will use the money that makes the round-trip back to their treasuries, intended uses reported by elected officials in some states include funding other health-care or education programs, as well as subsidizing a state tax cut; (7) in GAO's view, this financing practice violates the integrity of Medicaid's federal/state partnership; (8) by receiving part of the money back from the provider and keeping the federal share associated with it, the state is--in effect--able to lower its own Medicaid contribution substantially below the share specified in federal law; (9) GAO has not yet been able to specifically determine how much of an effect this current practice will have in any one state; (10) however, GAO's analysis of previous financing schemes showed that the effect can be substantial; (11) for example, in 1994 GAO analyzed Michigan's use of similar funding mechanisms and found they had the effect of raising the federal share for Medicaid expenditures from 56 percent to 68 percent; (12) when related schemes came to light in years past, steps were taken to curtail them and restore the federal/state partnership as intended; (13) HCFA has drafted a regulation that would curtail this scheme, but the draft has not moved far in the rulemaking process; and (14) GAO urges HCFA to finalize this regulation and reiterate a recommendation to Congress that would close the door on financing practices that inflate the federal share by making excessive payments to government-owned facilities.